Online Fashion: A Venture Scale Opportunity That Silicon Valley Does Not Understand

Fashion is a HUGE industry. The global women’s clothing industry, just a piece of it, is expected to exceed $621 billion in 2014. How many industries do you know of that scale?

Yet, online, fashion has still relatively a small presence.

In this article, I will explain why, and how to unlock the potential of this enormous industry using the strategies and tactics of Silicon Valley.

Let’s start with a vision of what the online fashion industry ought to look like.

Going back to my Feb 2007 article articulating a vision for Web 3.0, what I want the web to become is my own personal shopper who curates my own personal store that is customized to my taste, my size, my budget.

Full disclosure, I started one of the first online fashion companies, Uuma, with precisely this vision in 1999. The same year, we received an acquisition offer from Ralph Lauren, but chose not to sell. In early 2000, the dotcom crash also crashed with it that venture.

We were way too early. But I am surprised that after 15 years, that vision still has not been realized.

In March 2011, I gave an interview to The Business of Fashion that discusses some of what is still missing.

I have thought a lot about why the industry hasn’t taken off online. (It seems, Bill Gurley at Benchmark has too.)

If I synthesize what I see is the core issue with online fashion, it is that entrepreneurs are thinking of the industry as a distribution channel a la Amazon, with price being the core differentiator. This is a gigantic mistake. Flash sales sites like Vente-Privee and Gilt Groupe focus squarely on price.

Other experiments are in social media. Polyvore is a Pinterest like social media site where people put outfits together. It’s a toy, although, their bet is that they will make affiliate commissions in the range of 10-15% from the overall online fashion e-commerce industry, which isn’t a bad bet. It has brought them investment from Benchmark.

The closest to what I would like to see, although it has no visual merchandising, is also a Benchmark company called Stitch Fix that sends a personalized selection of items to people’s homes. Customers can pay for what they keep, and return the rest. I don’t like this one, because I don’t want things to be sent over that I have not had a chance to see online first. The logistics of return, to me, are not attractive.

To give you a flavor of what could be, a high-end consumer of women’s fashion has a very big annual budget for clothes and accessories. The actual number can be well above $10,000. It is not price that drives this consumer segment. It is design, style, fit, the experience of shopping, discovering interesting new designers, and regularly checking the works of their favorite designers. A personal shopping/store site that can create a compelling user experience for this category could win, say, 20% of the wallet share of this consumer. At $2000 annual spending level, the site would only need 100,000 customers to reach $200 million in revenue. There are very few consumer industries that have the potential of that level of growth with that few customers, which makes it a venture scale opportunity. We’ll call this a Personalized SAKS Fifth Avenue.

So what is the secret of such a site? Why doesn’t it exist yet?

In my opinion, to achieve the full potential of such a site, we need an entrepreneur team who understands Fashion at sufficient depth, as well as Computer Science at sufficient depth. Understanding Fashion means understanding design, merchandising, and marketing of fashion. Understanding Computer Science means understanding expert systems and machine learning to be able to create a software engine that can really get to know each customer, and merchandise to that taste, dynamically create a well designed personal store that showcases that merchandise, and consistently buy products from designers who cater to that taste.

Further, this basic concept could also be applied to a specific designer who designs and markets a new line with some of the same principles as above. Instead of a personalized SAKS that carries multiple designers, we could also look at the opportunities to develop a personalized Ralph Lauren or Donna Karan. This would mean, Silicon Valley will need to start funding new design houses, which it has absolutely no clue how to do.

We could conclude that New York has an edge in this industry. To some extent, that is true. So do London, Paris, and Milan. On the design, marketing, merchandising aspects, yes, there is a basic understanding. However, how to translate that understanding into technology is serious computer science. That knowledge doesn’t exist anywhere else to that extent except in Silicon Valley.

And that tells me, it is time for the Valley to wake up, and start exploring these opportunities. There’s not one, not two, not five, but hundreds of very large global companies to be built in online fashion.

And we haven’t even started!